Key Takeaways
- Technical diligence shifted from a confirmatory check three weeks before signing to a pre-LOI gating item focused on software durability.
- Code & Co. partners Dan Bender and Kirby Montgomery report an increase in sellers pitching vibe-coded dashboards created right before diligence meetings.
- Target companies present unshared cloud artifacts and local mockups to claim higher valuation multiples for platforms that do not exist in production.
- On a transaction three months ago, Montgomery warned sponsors to price existing software only after finding the target's next-generation platform had no operational reality.
- Early technical diligence now separates software defense (protecting the core revenue engine) from offense (verifying real technology that expands market reach).
The Death of Confirmatory Tech Checks
For years, software private equity treated technical diligence as an afterthought. Deal teams signed a letter of intent, spent weeks negotiating purchase agreements, and brought in technical auditors right before closing to ensure the code repository was not empty. As Dan Bender of Code & Co. put it: “Back in the day tech was a bit of a confirmatory exercise. You would call us three weeks before signing it's like hey boys let's hope there's no skeletons in the closets take a look. Those were good times.”
Those times ended when generative coding tools lowered the barrier to building convincing prototypes. Technical diligence has broken into two pieces, with the initial evaluation moving well ahead of the letter of intent. Sponsors no longer wait for exclusivity to test whether software assets can survive. They want an immediate answer on technical defensibility before burning pursuit capital and partner time.
Bender notes that this early work centers on a simple binary: “a fairly specific focus on AI resilience, can they play defense and is there something magical here so that they can play offense, and only then we go a lot deeper.” If a company cannot defend its workflows from automated replacement, or if its claimed technical moat is an illusion, the transaction dies before term sheets exchange hands.
Spotting Vibe Code in the Data Room
The urgency behind pre-LOI inspection comes from a sharp rise in fabricated product maturity. Armed with modern developer tools, sellers assemble slick user interfaces overnight to support aggressive valuation targets. They claim their systems automate operational choices, only for technical auditors to find static files that never interact with production databases.
When sponsors evaluate these claims without engineering scrutiny, they risk pricing an unbuilt roadmap as an existing asset. Montgomery recalled a deal from three months ago where the target leadership displayed a polished next-generation platform: “we said to the investors they've got a vision but do not pay them a multiple for that thing. Pay them for the software they have today and also we need to prove out that they can maybe get to that future.”
The dilemma for investment committees is separating genuine code architecture from temporary cloud scripts. Montgomery explained that early diligence answers a direct financial question: “The first one is, is this company saying they're doing something special and they want to get paid extra for it? Is it true? Is it smoke or is it something that you guys can actually prove out?”
Why It Matters
Sponsors are rewriting the diligence sequence because software valuation multiples can no longer rely on unverified roadmaps. When target companies can conjure functional interfaces in days, capital allocators must treat pre-LOI code verification as an essential price discipline tool. Paying software multiples for vibe-coded collateral guarantees immediate write-downs once the operational reality surfaces.